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14 January 2014

2013 was a turbulent year for credit providers, with the regulatory landscape changing, claims for Payment Protection Insurance compensation still rolling in and card protection policies sold coming under fire.

In addition, the complexity, value and number of claims under s.75 have been on the rise. One factor behind that trend has been the significant number of PIP breast implant claims to hit the industry, which have come at a time when the number of timeshare and other property linked claims have also increased.

Unfortunately for consumer credit providers, it appears that that trend will only continue in 2014. Consumer awareness of the protection afforded by s.75 is higher and claims management companies appear to be taking extra interest in this; perhaps at a time when the revenues they earn from PPI are decreasing.

However, all of these factors may ultimately be overshadowed by the changes on the horizon across the spectrum of consumer protection laws.

Why make changes?

The EU Consumer Rights Directive 2011 started a period of significant change.

As a result of its requirements, the Government has produced and consulted on a range of new consumer protection laws that both bring together current consumer protection law and also introduce some significant new provisions. Many of these changes are to be implemented by June 2014 in the form of statutory instruments, including:

The Government has also drafted and consulted on the Consumer Rights Bill, a significant piece of legislation bringing together and expanding implied terms in consumer contracts, extending rights to contracts for digital content and consolidating unfair terms law.

The above instruments will impact directly and indirectly impact upon s.75 liability.

The CPUT 2013 Regulations principal purpose is to enact large parts of the EU directive by way of amendments to the Consumer Protection from Unfair Trading 2008 Regulations (CPUT 2008 Regulations).

Quietly, but significantly, when these regulations are finalised and they come in to force they will also amend s.75 with the effect that creditors will become liable to pay redress claimed as a result of a suppliers misleading sales practices. Misleading sales practices, for the purpose of s.75 will be those practices listed in regulation 5 of the CPUT 2008 Regulations. In summary, such practices include providing false information relating to:

the main characteristics of the product/ service/ digital content

the extent of the suppliers commitments (at the time of sale, or ongoing)

the price, or method of calculation of the price

any risks the consumer might face.

Misleading practices also include any presentation or marketing of a product which deceives the consumer, or is likely to deceive an average consumer, or creates confusion of any kind.

For the purposes of the amended s.75, if a debtor can show that a misleading sales practice has caused, or is likely to cause, an average consumer to take a transactional decision he would not otherwise have done, the debtor is entitled to redress. That redress is likely to fall within creditors s.75 liability.

Redress will be in the form of a right to unwind or a right to a discount, or alternatively, a right to damages, in the following ways:

Right to unwind - Debtors will have 90 days from the date of provision of the product, or the date the service is first provided, to rescind the contract if it is possible to do so. At the same time, the debtor is entitled to a refund of any sums paid. This clearly overlaps with debtors chargeback rights, so may be used simultaneously.

Right to a discount - Debtors can instead request the return of the relevant percentage of the price paid, or reduce future payments by the relevant percentage. If the market value of the product is less than £5,000, the "relevant percentage" is calculated by reference to the table supplied by the 2013 Regulations, and varies from a 25 discount if the prohibited practice was "minor", to a 100 discount if the prohibited practice was "very serious". If the products market value is over £5,000, courts may adopt a less formulaic approach.

Right to damages - In any event, a debtor will have a right to claim damages if financial losses have been suffered and/or if emotional distress has been caused (but only if the purpose of the contract was to provide pleasure, relaxation or peace of mind). If the right to unwind or discount has already been applied, any such payments should be taken into account.

In the event that the supplier or creditor fails to provide redress on the terms claimed, a debtor will have the right to issue civil proceedings against either or both parties. Alternatively a debtor could raise a complaint with the Financial Ombudsman Service (FOS). The FOS is likely to alter its approach to s.75 claims in light of the amendments and take the changes into account.

Impact of the CPUT 2013 Regulations

These regulations bring about a significant widening to the scope of s.75 and credit providers may well see an increase in s.75 claims over time. This is particularly the case given that, anecdotally at least, misleading sales practices are a specialty of short lived companies that leave liabilities at the feet of creditors after a short but profitable time marketing products of questionable integrity.

In addition, while a claim for misrepresentation is often difficult for a consumer to make out given the requirement that it must show the misrepresentation induced a decision to purchase, a claim on the basis of a misleading sales practice will be more straightforward given that consumers must only convince a court (or the FOS) that an average consumer would likely have been mislead.

Once the CPUT 2013 Regulations come into force its quite possible that claims management companies will use this opportunity to farm claims in order to test the approach of the FOS/courts with respect to the redress awards available.

Therefore, the CPUT 2013 Regulations are likely to lead to increased payments by creditors under s.75 and consideration should be given to the investigations that can be put in place to defend claims arising under these new provisions.

The CC Regulations, which come into force on 13 June 2014, provide clear rules for on-premises, off-premises and distance contracts. Overall the rules seek to obligate suppliers to provide prescribed pre-contract information and make it clear when an obligation to pay arises.

The CC Regulations also require suppliers to provide a clear right to cancel within a 14 day period, in the event of off-premises transactions.

Breaches of the CC Regulations will be an offence. However the majority of the regulations will not have a direct impact upon the underlying contracts. Accordingly, the impact on s.75 may be positive, in the sense that extra liability is unlikely to arise but suppliers will be required to take more care to avoid misrepresentations and generally to reduce the risk of unhappy customers.

However, one aspect of the CC Regulations which may directly impact upon s.75 liability is with regard to the "additional payments" provisions - those provisions prevent suppliers from taking additional payments without the express consent of the consumer; default tick-boxes will not be regarded as sufficient for these purposes. In addition, suppliers are precluded from using premium rate telephone numbers for use after a contract has been concluded.

The relevance of these provisions to s.75, is that in the event any "additional payment" is charged contrary to these regulations, those charges will be regarded as a charge refundable pursuant to the contract between consumer and supplier. Accordingly, a failure to repay such sums may well be regarded as a breach of contract and therefore fall within s.75 liability.

The Consumer Rights Bill

The Consumer Rights Bill was published and consulted on in 2013 and is a meaty piece of legislation that brings together 60 pieces of consumer protection legislation in one place and extends suppliers responsibilities.

The bill also offers new protection, including the right to refunds or replacement, for consumers who buy digital content e.g. ebooks, digital music, software games, downloads and apps.

Fundamentally, the bills purpose is to make it easier for consumers to understand and enforce their rights. The latest report from the Business Innovation and Skills Committee (published in December 2013) shows that consideration is still ongoing and the final form of the Bill is yet to be decided.

It will be important for credit providers to stay one step ahead of these changes as the bill is likely to impact directly upon the requirements of suppliers and, accordingly, s.75 liability of creditors.

Summary

2014 will be a year where consumers rights are well publicised and new protections come into force.

It is likely that the changes will bring about an increase in the losses consumer credit providers suffer under s.75. However, such losses can be reduced by carefully reviewing the approach to responding to s.75 claims; from investigating the presence of the debtor-creditor-supplier link, to determining the merits of underlying claims.

With claims management companies taking increased interest in s.75 claims as well, this is a very good time for creditors to review and, if necessary, update, their approach to s.75 claims.

Companies should undertake a comprehensive review and audit to identify those products and legacy contracts that are LIBOR-linked and carry out an in-depth risk assessment of discontinuation. Where possible, companies should look at appointing an individual to oversee the programme.

The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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